The Official Blog Of Larry Berman - CFA, CMT, CTA

Market Breadth Suggests Trend is Weakening

Market breadth analysis is a key factor in determining the probability of a trend continuing. Much of what I try to do when evaluating market risk is to assess a probability of the market going up versus going down over my time horizon, which tends to be 1 to 3 months. Seasonality often plays a part too, and Q3 tends to be the weakest of the 4 periods. So when the breadth numbers are weak early in the quarter, odds of an increase in volatility are higher. I look at longer-term horizons, but the confidence and risk factors are very different.

While there are many ways to look at how many stocks are participating in a rally, two that I like are the percentage of stocks above a long-term average (200-days) and the percentage of stocks making new 52 week highs. For most of 2017, a very strong market, each new high saw the number of stocks participating in the rally remain quite high. It peaked at well over 80% of stocks trending above their own 200-day averages in January 2018. The percentage of stocks making new 52-week highs was also very strong and increasing for most of 2017 with each market rally. The peak in December and January saw more than 25% of the index making new highs—very strong numbers.

So far in 2018, each subsequent rally has seen relatively low readings compared to 2017. That does not mean a top is in, nor does it mean investors should sell out their portfolios. It does mean the strength of the trend is weakening. All will know in the last 2 weeks the S&P 500 closed back above 2800 a few times, only a few percent from all-time highs. There are fewer stocks leading the market higher and that is troubling. For those using stops and trading the high momentum stocks, I would suggest tightening up your stops. With cash now paying over 2%, it has a higher yield than the S&P 500. We are one antitrust tweet away from AMZN falling 30% and trade wars hitting tech spending hard over the next few years. Antitrust issues are picking up some momentum on Capitol Hill.

About the authorLarry Berman

Larry Berman is a Co-Founder of ETF Capital Management and the Prosper Experiential Media. Over his 25 year career, Larry has worked for numerous top firms in New York, Boston, and Toronto. Prior to founding ETFCM (2006), he was Chief Technical Strategist and Managing Director for CIBC World Markets for nearly a decade where he was ranked as one of Canada’s “Top 3 Analysts” according to Brendan Wood institutional investor surveys. READ MORE